The Global Markets Weekly – 6/15/15

Posted June 15, 2015 by rvillareal

Crowded Trades Get Greeksy[private]

For analysts, the backup in the global bond markets that started in late April reflects two desirable outcomes.  First, a mounting sense that growth in the developed world has bottomed.  Second, that the forces of disinflation have moderated and that inflation may soon bottom.  While desirable in the current environment, these developments usually lead to higher interest rates over time.  That development has presented problems for investors, particularly those who have gotten themselves into some crowded trades.

One of the more crowded is the “QE trade” on Europe and Japan, in which the investor are short the currency but long equities.  The rise in yields has made this an unpleasant position and has these trades have reversed, adding to the pressure on yields.  In addition, the drying up of liquidity as traditional market markers like dealer desks have been downsized or eliminated only adds to the volatility and promotes higher yields.

And finally, the risks of the Greek meltdown has intensified.  As we discussed in our focus article last week, it is hard to figure out strategies and end games of both parties-the Greek borrowers and the European lenders.  It is not clear if both sides agree that the goal should be a more modern self-sufficient Greece, achieved only by compromises on both sides.  Right now, the negotiating tactic is to wait until the other guy blinks, an approach which risks another Lehman moment.  Perhaps the worst outcome might be another “extend and pretend” in which the old debt is rolled over and new borrowings undertaken with no real progress.  This would be kicking the can down the road but on what road and to what final outcome?

• U.S.:  The Fed will begin laying the groundwork for September policy liftoff in the statement and following press conference (Wed).  If the FOMC is truly data dependent, the chances of miscommunication are rising since they can wait to the last minute to make up their minds.  Perhaps there will be stereo dissents with both a hawk and dove dissatisfied.
• Eurozone:  It looks as if its creditors are fed up with the posturing of the Greek Government in the on-going bail-out deal discussions.  It seems Greece has been betting that its creditors would blink first. Instead, it seems that Greece is being offered the take-or-leave deal it was given last week, the question being whether an answer arrives before the meeting of Eurozone finance ministers on Thursday!
• UK:  UK: There is an array of key data and BoE updates this week, although the CPI numbers (Tue) may attract most media attention; a higher outcome is seen.  Even so, wage data in the Labor Market Report (Wed) may be the most influential to BoE thinking.
• Japan: Two main items are scheduled, May Merchandise Trade data (Wed) and the monthly BOJ Policy Board meeting (ends Fri).  The BOJ meeting, while very unlikely to be pivotal, will be the more important event, though any extreme surprise in the trade results might ripple the Policy Board discussion.
• CB watch:  In Switzerland, the SNB quarterly assessment (Th) is not attracting too much attention as it is widely agreed that the central bank will keep policy rates steady.  In Norway, the Norges Bank meeting (Th) may surprise with another hold rather than the easing bias being exercised!  .
• Emerging Markets/Regions:  In Brazil, the major indicators this week like retail sales will show that the downturn is deeper than the official GDP figures suggest of nearly 2% yoy.

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